Testimony

Before the Subcommittee on Government Efficiency,

Financial Management and Intergovernmental

Relations, Committee on Government Reform, House

of Representatives

United States General Accounting Office

GAO

For Release on Delivery

Expected at 10 a.m.

Wednesday, December 5, 2001 DEBT COLLECTION

IMPROVEMENT ACT OF

1996

Department of Agriculture

Faces Challenges

Implementing Certain Key

Provisions

Statement of Gary T. Engel

Director, Financial Management and Assurance

GAO-02-277T
Page 1 GAO-02-277T

Mr. Chairman and Members of the Subcommittee:

I appreciate the opportunity to be here today to discuss debt collection

initiatives of two major components of the Department of Agriculture—

the Rural Housing Service (RHS) and the Farm Service Agency (FSA). As

you well know, collecting delinquent debt has historically presented major

challenges for federal agencies. It is with this backdrop that the Congress,

with a key role played by this Subcommittee, passed the Debt Collection

Improvement Act of 1996 (DCIA). Among other things, DCIA requires

agencies to (1) notify the Department of the Treasury (Treasury) of debts

delinquent over 180 days for purposes of administrative offset against any

amounts that might otherwise be due to those persons or entities, and

(2) refer such debts to Treasury for centralized collection action known as

cross-servicing. In addition, to facilitate debt collection, the act authorizes

agencies to administratively garnish the wages of delinquent debtors.

While my testimony today is limited primarily to our work related to RHS

and FSA, our audit results are based on a larger body of work, on which I

testified before this Subcommittee on October 10, 2001.1

 That work

assessed the progress of selected agencies in referring debt for

administrative offset and cross-servicing and in implementing certain

other key provisions of DCIA—administrative wage garnishment (AWG)

and the debtor bar provision. In preparation for this testimony, we

reviewed the Department of Agriculture’s (Agriculture) response to this

Subcommittee’s October 16, 2001, letter containing questions concerning

the agencies’ progress in referring delinquent debt to Treasury’s Financial

Management Service (FMS) and mitigating any barriers to complete and

timely referrals. This updating work was done in accordance with U.S.

generally accepted government auditing standards.

Today, I will discuss (1) difficulties RHS and FSA have experienced

identifying and referring eligible debts to FMS, (2) obstacles that have

hampered their prompt referral of eligible debts, and (3) whether

exclusions from referral requirements were consistent with established

criteria. In addition, my testimony will cover Agriculture’s actions and

plans in context with information dealing with the extent to which eight

other large Chief Financial Officers (CFO) Act agencies and FMS use or

plan to use AWG to collect delinquent federal non-tax debt.

 1

Debt Collection Improvement Act of 1996: Agencies Face Challenges Implementing

Certain Key Provisions (GAO-02-61T, Oct. 10, 2001).
Page 2 GAO-02-277T

First, a few overall comments about DCIA implementation. We testified

before this Subcommittee in June 2000 that, although DCIA was enacted in

April 1996, the act’s cross-servicing provision still had not been fully

implemented.2

 We emphasized that on a governmentwide basis, the vast

majority of reported debt delinquent over 180 days was being excluded by

agencies from referral requirements under exclusions allowed by DCIA or

Treasury. However, we cautioned that the reliability of the amounts

reported as excluded was not being independently verified. We also

stressed that agencies were not promptly referring all eligible debts to

FMS. The picture left with your Subcommittee was that agency

implementation would have to improve vastly if the debt collection

benefits of DCIA were to be more fully realized.

On the other hand, I am pleased to report that FMS, in partnership with

agencies, is making steady progress in collecting delinquent federal nontax debt through the Treasury Offset Program (TOP). As you know, TOP is

a mandatory governmentwide debt collection program that compares

delinquent debtor data to certain federal payment data. Agencies are

required to refer eligible delinquent debt to TOP as soon as it is 180 days

delinquent, but may, at their discretion, refer it sooner. When a delinquent

debtor record matches a payment record, TOP recovers all or a portion of

the delinquent debt by offsetting some or all of the federal payment

scheduled to be issued to the debtor. During each of the last 3 years, FMS

has reported collecting over $1 billion of such debt with TOP by offsetting

tax refund payments. Tax refund offsets have been FMS’ most effective

means of debt collection and collections have increased, in part, as a

result of systems changes the agency implemented. For example, the TOP

system can offset against both the primary and secondary taxpayer, where

the previous tax refund system could only offset against the primary

taxpayer. In addition, the TOP system can accept new debts or increased

debt balances all during the year, whereas the previous tax refund system

could only accept them at the beginning of the tax season.

While there has been important progress, our follow-up work at selected

agencies, including Agriculture, over the past several months has not

allayed our concerns about the priority agencies have placed on

implementing DCIA. As I will highlight today, Agriculture has not yet taken

 2

Debt Collection: Treasury Faces Challenges in Implementing Its Cross-Servicing

Initiative (GAO/T-AIMD-00-213, June 8, 2000).
Page 3 GAO-02-277T

effective actions to ensure that all eligible delinquent debt is promptly

referred to FMS for collection action. For example,

• As of September 30, 2000, RHS reported that it had referred to TOP $201

million of direct single-family-housing (SFH) loans but had not referred

any amounts to FMS for cross-servicing, primarily due to systems

limitations. According to RHS officials, the agency will refer 100 to 200

loans a month to FMS until the systems limitations are rectified. Also,

RHS’ reported delinquent direct SFH loans eligible for TOP might have

been understated by about $348 million because it did not report all

amounts that were due and payable.

• FSA did not have an adequate process or sufficient controls to adequately

identify and report direct farm loans eligible for referral to FMS as of

September 30, 2000. In addition, a large portion of the approximately $400

million of delinquent direct farm loans that became eligible for TOP during

calendar year 2000 likely was not promptly referred because the agency

refers debts to TOP only once annually, during December. Further, FSA

did not refer co-debtors for the $934 million of delinquent farm loans

previously referred to TOP because of systems limitations that had existed

for years. Moreover, the agency had referred only $38 million of direct

farm loans to FMS for cross-servicing because it suspended crossservicing referrals pending development and implementation of its new

cross-servicing policy. According to an Agriculture official, the first

referral to FMS under this new policy was made in September 2001.

• RHS and FSA have not referred to FMS for collection action any losses on

their guaranteed SFH and farm loans, respectively, even though through

September 30, 2000, they have experienced losses of about $132 million

and about $293 million, respectively, on such loans since the enactment of

DCIA.

Also, Agriculture and other agencies still have not utilized AWG as

authorized by DCIA to collect delinquent non-tax debt even though

experts have testified before this Subcommittee that AWG can potentially

be an extremely powerful debt collection tool.

As stated in my testimony on October 10, 2001,3

 if the government is going

to make significant progress in collecting the billions of dollars of

 3

GAO-02-61T, Oct. 10, 2001.
Page 4 GAO-02-277T

delinquent non-tax debt, expedient and effective implementation of the

debt collection provisions of DCIA must be given a high priority by

agencies. This has not been the case at the agencies we reviewed. In many

cases, the agencies continue to show extended milestones for needed

corrective actions years in the future, even though substantial amounts of

eligible delinquent debt have still not been referred.

RHS administers a direct SFH loan program to help low-income

individuals or households purchase homes in rural areas. As of September

30, 2000—the most recent fiscal year end for which agency-certified

reporting exists for Agriculture—RHS reported having about $17 billion

outstanding in direct SFH loans. As shown in table 1, RHS reported $383

million of direct SFH loans over 180 days delinquent, including debts

classified as Currently Not Collectible (CNC) on its Treasury Report on

Receivables Due From the Public (TROR) as of September 30, 2000.4

Table 1: RHS’ Direct SFH Delinquent Loans as of September 30, 2000

Debt amounts (in

millions of dollars)

Debts more than 180 days delinquent, including debts in CNC $383

Less: exclusions allowed by DCIAa 182

Debts eligible for Treasury offset 201

Debts referred to Treasury for offset 201

Debts referred to Treasury for cross-servicing 0

a

Exclusions were for bankruptcy, forbearance/appeals, and foreclosure.

Source: TROR fourth quarter 2000 (September 30, 2000).

RHS excluded $182 million of this delinquent debt from referral to FMS for

TOP and cross-servicing. In addition, RHS had not referred any debts to

FMS for cross-servicing as of September 30, 2000, based, in part, on an

exemption proposal which RHS stated, in its TROR as of the same date,

had been approved by Treasury. However, Treasury officials told us that

Treasury never approved a proposal to exempt RHS loans from crossservicing. Accordingly, opportunities to collect these loans through

Treasury’s cross-servicing program are being missed.

 4

CNC debts are debts the agency has written off for accounting purposes but has not

discharged. Collection action can still be taken on such debts.

RHS’ Direct SingleFamily-Housing Loan

Program
Page 5 GAO-02-277T

DCIA requires federal agencies to refer all legally enforceable and eligible

non-tax debts that are more than 180 days delinquent to Treasury for

collection through administrative offset and cross-servicing. We found that

RHS did not maintain supporting documentation for direct SFH loans it

excluded from such referral as of September 30, 2000. Consequently, we

were not able to determine whether the agency’s exclusion of $182 million

of delinquent debt was based on relevant legislative and regulatory

criteria. FMS officials told us that it is their expectation that agencies

would retain the applicable data needed to justify not referring delinquent

debt for collection action. Further, the Comptroller General’s Standards

for Internal Controls in the Federal Government states that all

transactions and other significant events need to be clearly documented

and that the documentation should be readily available for examination.5

According to RHS officials, since implementing a new automated

centralized loan servicing system in fiscal year 1997, RHS has been unable

to readily identify direct SFH loans that are eligible for referral to FMS for

cross-servicing. Essentially, the system does not contain sufficient data to

differentiate loans eligible for cross-servicing from those that are not.

Although RHS plans system enhancements for the third quarter of fiscal

year 2002, which the agency believes will facilitate loan identification for

cross-servicing, RHS officials advised us that relatively few referrals to

FMS will likely be made in the near term. While we were performing our

fieldwork, RHS began an interim process to manually identify such loans

eligible for cross-servicing. According to RHS’ debt referral plan, because

the interim process is tedious and labor intensive, only about 100 to 200

loans were to be referred per month to Treasury, beginning in May 2001.

RHS officials said that all direct SFH loans eligible for TOP will have to be

reviewed for cross-servicing eligibility. RHS reported 23,032 direct SFH

loans eligible for TOP as of September 30, 2000. The agency intends to

refer about 30 percent of eligible direct SFH loans for cross-servicing in

fiscal year 2002.

According to RHS officials, nothing had been done prior to our review to

manually identify delinquent direct SFH loans for referral to FMS for

cross-servicing because the agency had requested a Treasury exemption

 5

Standards for Internal Control in the Federal Government (GAO/AIMD-00-21.3.1, Nov.

1999).

Support for Not Referring

a Significant Amount of

Delinquent Direct SFH

Loans Not Maintained

Systems Limitations

Hampered Referral

Activity

Exemption Request

Denied
Page 6 GAO-02-277T

from cross-servicing for direct loans made under the SFH loan program.

RHS had requested that it be allowed to continue to internally service the

loans for up to 1 year after liquidation of the collateral, which, in some

cases, could be years after the loans became delinquent. Treasury officials

told us that Treasury had not approved the request, either formally or

informally, and stated that Treasury discouraged RHS from making the

request, which was not submitted to Treasury until November 2000.

Treasury formally denied RHS’ exemption request for the direct SFH loan

program on May 14, 2001. The declination was based, in part, on the fact

that similar loans were being referred for cross-servicing by other agencies

and RHS had not identified any new or unique collection tools applicable

to direct SFH loans.

When a debtor becomes delinquent 91 days on an installment payment for

a direct SFH loan, RHS notifies the debtor via certified mail that the entire

debt balance is accelerated and is due and payable. As shown in table 1,

RHS reported $201 million of direct SFH loans as eligible for TOP as of

September 30, 2000. However, this amount may have been understated by

about $348 million because it only included the delinquent installment

portion of the loans. According to FMS, the entire accelerated balance of

the debt should be reported as delinquent and, absent any exclusions

allowed by DCIA or Treasury, should be reported as eligible for referral to

FMS for collection as well.

FSA provides, among other things, temporary credit to farmers and

ranchers who are high-risk borrowers and are unable to obtain

commercial credit at reasonable rates and terms. FSA reported having

about $8.7 billion in direct farm loans as of September 30, 2000, and as

shown in table 2, the agency reported about $1.7 billion of direct farm

loans over 180 days delinquent, including debts in CNC status as of

September 30, 2000.

RHS May Have

Significantly Understated

Direct SFH Loans Eligible

for Referral

FSA’ s Direct Farm

Loan Program
Page 7 GAO-02-277T

Table 2: FSA’s Delinquent Direct Farm Loans as of September 30, 2000

Debt amounts

(in millions of dollars)

Debts more than 180 days delinquent, including debts in CNC $1,666

Less: exclusions allowed by DCIAa 732

Debts eligible for Treasury offsetb 934

Debts referred to Treasury for offset 934

Debts referred to Treasury for cross-servicing 38

a

The vast majority of the reported exclusions were for bankruptcy, forbearance/appeals, foreclosure,

and Department of Justice (DOJ)/litigation.

b

In addition, other exclusions from referrals to FMS for cross-servicing, including internal offset, were

reported by FSA as of September 30, 2000.

Source: TROR fourth quarter 2000 (September 30, 2000).

FSA excluded substantial amounts of this debt from referral to FMS for

TOP and cross-servicing. In addition, FSA officials told us that only

$38 million was referred to FMS for cross-servicing as of September 30,

2000, because FSA suspended all cross-servicing referrals in April 2000

pending development and implementation of new cross-servicing

guidelines for the agency.

FSA did not have a process or sufficient controls in place to adequately

identify direct farm loans eligible for referral to FMS. Certain types of

debts were automatically excluded from referral without any review for

eligibility. In other cases, FSA’s Program Loan Accounting System did not

contain information from the detailed loan files located at the FSA field

offices that would be key to determining eligibility for referral. In addition,

FSA did not have any monitoring or review procedures in place to help

ensure that FSA personnel routinely updated the detailed debt files.

Consequently, amounts of direct farm loans FSA reported to Treasury as

eligible for referral were not accurate.

Excluded amounts for bankruptcy, forbearance/appeals, foreclosure, and

Department of Justice (DOJ)/litigation totaled about $694 million, or about

95 percent of the $732 million that was excluded from referral to FMS for

TOP and cross-servicing. Of this amount, $295 million was for

DOJ/litigation and was comprised of judgment debts. According to FSA

officials, deficiency judgments—court judgments requiring payment of a

sum certain to the United States—are eligible for TOP and should be

referred to FMS. However, FSA’s Finance Office in St. Louis automatically

excluded all judgment debts for direct farm loans from referral to FMS

Effective Process and

Controls Lacking for

Determining Eligibility for

Referral of Direct Farm

Loans
Page 8 GAO-02-277T

because automated system limitations precluded staff from identifying

deficiency judgments. Our inquiries caused FSA officials to initiate a

special project in May 2001 to identify all deficiency judgment debts for

direct farm loans so that such debts could be referred to FMS.

Determinations as to whether direct farm loans are in bankruptcy,

forbearance/appeals, or foreclosure and, therefore, excluded from referral

to FMS, are made by FSA personnel in numerous FSA field offices across

the country. Personnel in the FSA field offices we visited did not routinely

update the eligibility status of farm loans in FSA’s Program Loan

Accounting System, as was evident by the selected excluded loans we

reviewed. Using statistical sampling, we selected and reviewed supporting

documents to determine whether farm loans that selected FSA field offices

in California, Louisiana, Oklahoma, and Texas had excluded from referral

to FMS were consistent with established criteria dealing with bankruptcy,

forbearance/appeals, foreclosure, and DOJ/litigation.6

 Based on the results

of our sample, we estimate that about 575, or approximately one-half of

the excluded loans in the four selected states, had been inappropriately

placed in exclusion categories by FSA as of September 30, 2000.7

 Because

of these numerous errors, we did not test other reported exclusions from

referral to FMS for cross-servicing, such as loans being internally offset.

One of the most frequently identified inappropriate exclusions pertained

to amounts discharged in bankruptcy, which should not have been

included in delinquent debt. Fifty-two bankruptcies that we reviewed as

part of our sample had been discharged in bankruptcy court prior to

September 30, 2000. In fact, many had been discharged several years prior

to that date. For example, one loan with a balance due of about $325,000

was reported as a delinquent debt over 180 days and excluded from

referral requirements because of bankruptcy. However, a review of the

loan file at the FSA field office showed that a bankruptcy court discharged

the debt in 1986 and, therefore, the debt should not have been included in

either the delinquent debt or exclusion amounts reported to Treasury as of

September 30, 2000.

 6

Field offices in these four states serviced about $272 million, or about 39 percent, of the

total debts excluded from referral to FMS as of September 30, 2000, for bankruptcy,

forbearance/appeals, foreclosure, or DOJ/litigation.

7

We estimate that 48.5 percent + 15.7 percent of the population were inappropriately

reported as exclusions from referral to TOP. When projecting these errors to the

population of 1,187 loans, we are 95 percent confident that the errors in the population are

between 389 and 761 loans.
Page 9 GAO-02-277T

According to Farm Loan Managers in some of the FSA field offices we

visited, they have not written off many direct farm loans discharged in

bankruptcy because making new loans has been a higher-priority use of

their resources. In addition, FSA did not provide sufficient oversight to

help ensure that field office personnel adequately tracked the status of

discharged bankruptcies and updated the loan files and debt records in the

Program Loan Accounting System. Also, it is important to note that delays

in promptly writing off discharged bankruptcies not only distort the TROR

for debt management and credit policy purposes, but also distort key

financial indicators such as receivables, total delinquencies, and loan loss

data. This makes the information misleading for budget and management

decisions and oversight. Aside from erroneously inflating reported

receivables and delinquent loans, failure to process loan write-offs delays

reporting closed-out debt amounts to the Internal Revenue Service as

income to the debtor.8

As previously mentioned, only $38 million of direct farm loans were

reported by FSA as having been referred for cross-servicing because the

agency suspended such referrals in April 2000 pending development and

implementation of a new policy to refer to FMS for cross-servicing only

debts where the 6-year statute of limitations has not expired. FSA issued

revised guidelines in July 2001 to incorporate the 6-year statute of

limitations, and the agency is now reviewing loans at over 1,000 FSA field

offices to determine eligibility for referral to Treasury under the new

policy. According to an Agriculture official, the first referral to FMS under

this new policy was made in September 2001.

According to FSA officials, FSA decided to adopt the new policy because it

believed that FMS informed them that accounts for which the 6-year

statute of limitations had expired should not be referred for crossservicing. However, FMS officials told us that FMS had not provided such

guidance to FSA. FMS officials emphasized that FMS will accept debts that

are older than 6 years because, although the debts cannot be referred to

DOJ for litigation, collection can still be attempted through other debt

collection tools such as referral to private collection agencies.

 8

The Federal Claims Collection Standards—which were last updated in November 2000—

and OMB Circular A-129 both require agencies, in most cases, to report closed-out debt

amounts to the Internal Revenue Service as income to the debtor.

Referrals of Direct Farm

Loans for Cross-Servicing

Suspended
Page 10 GAO-02-277T

Even though FSA reported having referred $934 million of direct farm

loans to FMS for TOP as of September 30, 2000, the agency has lost and

continues to lose opportunities for maximizing collections on this debt

because it does not refer co-debtors. According to FSA officials, the vast

majority of direct farm loans have co-debtors, who are also liable for loan

repayment. However, FSA’s automated loan system cannot record more

than one debtor because the system modifications necessary to accept

Taxpayer Identification Numbers (TINs) for multiple debtors have not

been made. According to an FSA official, the need to have co-debtor

information in the system to facilitate debt collection was initially

determined in 1986. However, we were told that to date, higher-priority

systems projects have precluded FSA from completing the necessary

systems enhancements to allow the system to accept more than one TIN

per debt. In other words, although FSA recognized years ago the need to

take action, the agency has not considered this to be a high enough

priority. According to FSA officials, FSA has now incorporated this

requirement in the new Farm Loan Program Information Delivery System

scheduled for implementation in fiscal year 2005.

According to data provided by FSA officials, about $400 million of new

delinquent debt became eligible for TOP during calendar year 2000.

Although FSA officials stated that the debts became eligible relatively

evenly throughout the year, debts eligible for TOP are referred by FSA

only once annually, during December. Consequently, a large portion of the

$400 million of debt likely was not promptly referred when it became

eligible. As we have previously testified, industry statistics have shown

that the likelihood of recovering amounts owed decreases dramatically

with the age of delinquency of the debt.9

 Thus, the old adage that “time is

money” is very relevant for referrals of debts to FMS for collection action.

FSA officials told us that the agency agrees that quarterly referrals could

enhance possible collection of delinquent debts by getting them to

Treasury earlier and has plans to start a quarterly referral process in fiscal

year 2003.

 9

GAO/T-AIMD-00-213, June 8, 2000.

Co-Debtors Not Referred

for TOP

Eligible Debt Not Promptly

Referred to TOP
Page 11 GAO-02-277T

Since DCIA was enacted in April 1996, RHS and FSA have also missed

opportunities to potentially collect millions of dollars related to losses on

guaranteed loans. As of September 30, 2000, neither RHS nor FSA treated

such losses resulting from the SFH program and the Farm Loan Program,

respectively, as non-tax federal debts. Consequently, neither agency had

policies and procedures in place to refer such losses to Treasury for

collection through FMS’ TOP or cross-servicing programs.

According to RHS and FSA officials and reports provided by the agencies,

guaranteed SFH loans and farm loans, as well as related losses, have been

significant since the inception of the guaranteed programs. The RHS

guaranteed SFH program has been expanding in recent years. The

outstanding principal due on the guaranteed SFH portfolio grew from

about $3 billion in fiscal year 1996 to over $10 billion as of September 30,

2000. Through September 30, 2000, RHS had paid out losses of about

$132 million on the guaranteed SFH program since fiscal year 1996. The

outstanding principal due on guaranteed farm loans was about $8 billion

as of September 30, 2000. Through September 30, 2000, FSA had paid out

about $293 million in losses since fiscal year 1996.

In January 1999 and June 2000, Agriculture’s Office of Inspector General

(OIG) first reported that RHS’ and FSA’s guaranteed losses, respectively,

were not being referred to Treasury for collection. The OIG recommended

that both agencies recognize the losses as federal debt and begin referring

such debt to FMS for collection.

Although RHS has recently initiated action to begin developing policies for

referring losses on guaranteed loans to FMS for collection action in the

future, its efforts to make necessary regulatory and policy changes have

not been fully completed, resulting in continuing missed opportunities to

potentially collect losses on guaranteed loans. FSA, on the other hand, has

recently initiated action to begin implementing new policies for referring

losses on all new guaranteed loans to FMS for collection action. Because

these guaranteed loan programs are significant to RHS and FSA, the

agencies’ development and implementation of policies and procedures to

promptly refer eligible amounts to Treasury for collection action are

critical.

RHS and FSA Have

Not Referred Losses

on Guaranteed Loans

to FMS
Page 12 GAO-02-277T

DCIA authorizes both federal agencies that administer programs that give

rise to delinquent non-tax debts and federal agencies that pursue recovery

of such debts, such as FMS, to administratively garnish up to 15 percent of

a debtor’s disposable pay until the debt is fully recovered.10 Agriculture

and the other eight CFO Act agencies we surveyed had not yet used AWG

as authorized by DCIA to collect delinquent non-tax debt as of the date of

completion of our fieldwork, over 5 years after DCIA went into effect.

Eight of these nine agencies, including Agriculture, have expressed the

intent to implement AWG to varying degrees over the next 5 years. Given

the possible added collection leverage afforded through the availability

and use of AWG, timely implementation would seem prudent. As of

September 30, 2000, the eight agencies we surveyed that intend to

implement AWG reported holding a total of about $23 billion in consumer

debt,11 which typically consists of debts by individuals, many of whom are

employed.12 This is not to imply that AWG could be used to collect all such

consumer debt because circumstances such as bankruptcy or appeals

could limit the application of this debt collection tool.

Agencies, including Agriculture, identified various reasons for the delay in

implementing AWG, including the need to focus priorities on the

mandatory provisions of DCIA and develop the required regulations or

administrative hearing procedures to implement AWG. This is

disappointing in light of the large population in the country’s labor force

and the fact that debt collection experts testified before this

Subcommittee in 1995, prior to the enactment of DCIA, that AWG can be

an extremely powerful debt collection tool, as the mere threat of AWG is

often enough to motivate debtor repayment.

 10Disposable pay means that part of the debtor’s compensation (including, but not limited

to, salary, bonuses, commissions, and vacation pay) from an employer remaining after the

deduction of health insurance premiums and any amounts required by law to be withheld.

11The agencies held over $25 billion in debts classified as CNC, which were not broken out

by consumer and commercial debts on the agencies’ TRORs. Although CNC debts are

written off by the agencies for accounting purposes, AWG could be applicable to significant

amounts of such debts.

12Consumer debt is more likely to be subject to AWG because the debtor is often an

individual who is employed. Certain commercial debts could involve individual debtors,

guarantors, or co-debtors, and AWG may be applicable to such debtors.

Agriculture and Most

Other Agencies Have

Not Used AWG to

Collect Delinquent

Debt
Page 13 GAO-02-277T

In responding to our survey, Agriculture said it would rely exclusively on

FMS to implement AWG as part of cross-servicing, including identifying

the debtors’ employers and sending notices and garnishment orders. At the

time of the completion of our fieldwork, Agriculture had not established

specific dates for implementing AWG and was among the five surveyed

agencies intending to implement AWG that did not have a written

implementation plan. Agriculture subsequently stated that it planned to

implement AWG during fiscal year 2002. Given the extent of agency or

contractor effort needed to carefully administer such processes, we

believe agencies will need fairly detailed implementation plans. These

plans should include a clear description of and strategy for how the

agency will actually perform AWG and when AWG will be fully

implemented. The plans should cover the types of debts subject to AWG

and the policies and procedures for administering AWG. Also, agencies

should identify the processes they will use to conduct hearings for debtor

appeals. Consequently, it is not presently clear when Agriculture will be

able to fully incorporate AWG into its debt collection processes.

FMS has been working with its private collection agency contractors to

incorporate AWG into its cross-servicing program. Although FMS’

incorporation of AWG into the cross-servicing program would

undoubtedly improve collection success and make the FMS collection

program more comprehensive, certain factors could limit its use. An

important consideration is that much of the delinquent debt reported by

agencies as eligible for cross-servicing is not currently being promptly

referred to FMS. For example, the four agencies we surveyed that plan to

rely exclusively on FMS for AWG implementation, including Agriculture,

together reported having referred only $288 million of about $690 million

of all types of debt that were reported as eligible for cross-servicing as of

September 30, 2000.13

Although implementation of AWG under DCIA is still largely in its infancy,

the extent to which the larger CFO Act agencies, such as Agriculture, refer

all eligible delinquent debt in a timely manner will be a major factor in

FMS’ ability to make AWG fully successful. As discussed previously, RHS

and FSA have not identified and promptly sent debts to FMS for cross-

 13According to FMS’ Performance Summary Report for July 2001, only 63 percent of debt

reported by federal agencies as eligible for cross-servicing governmentwide as of

September 30, 2000, had been referred to FMS.

Agriculture’s

Implementation of AWG

Certain Factors Could

Limit FMS’ Use of AWG
Page 14 GAO-02-277T

servicing. Consequently, if AWG were to have been attempted using only

those delinquent debts reported as referred for cross-servicing for fiscal

year 2000, substantial amounts of delinquent debt would not have been

subject to this debt collection tool.

The ability to efficiently handle requests for hearings will also be

important. FMS has assigned responsibility for holding AWG hearings to

the agencies that use AWG as a collection tool—whether in-house, through

FMS, or both. Therefore, these agencies need to develop and acquire the

capacity to manage the hearings process expediently.

In summary, as we have discussed, Agriculture, along with other agencies,

has not demonstrated a sense of urgency in integrating certain provisions

of DCIA into its debt collection processes. Challenges lie ahead for

Agriculture to successfully implement such provisions of the act. As a

result, until these provisions are fully implemented, Agriculture will

continue to miss opportunities to collect millions of dollars of delinquent

federal non-tax debt. To assist in addressing such challenges, we will be

separately providing recommended actions to Agriculture.

Mr. Chairman, this concludes my prepared statement. I would be pleased

to respond to any questions you or other Members of the Subcommittee

may have.

For information about this testimony, please contact Gary T. Engel at

(202) 512-3406. Major contributors to this testimony include Arthur W.

Brouk, Richard T. Cambosos, Michael S. LaForge, and Kenneth R. Rupar.

Contacts and

Acknowledgments

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